This article first appeared in The Edge Malaysia Weekly on June 28, 2021 - July 4, 2021

JUST a year ago, as the country emerged from the first Movement Control Order (MCO), the World Bank had expected Malaysia’s economy to rebound as strongly as 6.9% this year. Last Wednesday, however, that robust forecast had dwindled to 4.5% after yet another cut, owing to a resurgence in Covid-19 infections as well as slower-than-expected vaccine rollout.

The latter is partly due to supply constraints faced in many parts of the world. Yet, there are things that Malaysia and Malaysians can and must do better to ensure the country will not see more downgrades in the coming months — taking a leaf from discussions following the release of the World Bank’s latest Malaysia Economic Monitor as well as Standard & Poor’s assessment of the country’s sovereign rating last week.

S&P affirmed Malaysia’s ‘A-’ rating last Tuesday but kept the country’s outlook at “negative”. “The negative outlook reflects our expectation that Malaysia faces heightened risks to its fiscal and economic recovery prospects over the next 12 to 24 months related to the Covid-19 pandemic and domestic political uncertainty,” the rating agency said in its statement dated June 22, adding that it found it “difficult to gauge” the support for the Perikatan Nasional (PN) coalition, which has been ruling under a state of emergency since January.

“Downward rating pressure could also build if political stability in Malaysia deteriorates such that policymaking becomes materially less predictable, or if the country’s external position weakens such that the economy’s annual gross external financing needs surplus current account receipts plus usable reserves.”

On the flipside, however, S&P said it might revise the outlook to stable over the next 12 to 24 months if the Malaysian economy “grows considerably faster than [it] forecasts, or the policy environment becomes more conducive to credible fiscal consolidation”. That, it adds, would help fiscal performance to come in stronger than it expects and lead to quicker stabilisation of government finances.

Finance Minister Tengku Datuk Seri Zafrul Aziz was quick to respond, pointing out that “approximately 20% of all sovereigns with negative outlooks as at end-2020 have been downgraded by the three main credit rating agencies thus far”. The affirmation “demonstrates S&P’s confidence in Malaysia amid unprecedented credit rating pressures globally” and is “a testament to the country’s strong external position, monetary policy flexibility, recognised track record of supporting economic growth as well as economic resilience during times of uncertainty”.

S&P and Moody’s have, thus far, not followed Fitch Ratings’ lead last December in cutting Malaysia’s rating to ‘BBB+’ from ‘A-’ — the country’s first since the Asian financial crisis.

In a three-page statement dated June 22, Zafrul pointed out that Malaysia had managed to reduce average daily cases from as high as 8,000 to 5,000 and is on track to raising vaccination capacity to have 60% of the population inoculated by end-October to pave the way for all social and economic sectors to reopen. He also recounted the support available to businesses and reiterated the government’s commitment to the medium-term fiscal consolidation and structural reforms that are necessary to enhance Malaysia’s growth potential, including the implementation of the National Investment Aspirations to attract higher-quality investments that will generate higher-skilled and better-paying jobs.

“Other factors that will drive Malaysia’s economic recovery include improving external demand from major trading partners, along with a diversified economy and implantation of infrastructure projects with a high multiplier impact. Notably, S&P has acknowledged that Malaysia’s mature electrical and electronics (E&E) manufacturing sector is well-positioned to benefit from a global surge in demand and the global tech upcycle, supporting exports for the next one to two years. The government’s policy in encouraging digitalisation and technological adoption is also set to boost Malaysia’s longer-term economic prospects and resilience,” he says, adding that the 12th Malaysia Plan (2021 to 2015) “will provide a blueprint for sustainable growth, aimed at strengthening socio-economic inclusivity, and environmental sustainability”.

The Federation of Malaysian Manufacturers (FMM), which represents more than 10,000 member companies from the manufacturing supply chain that want to be well-positioned to capture opportunities presented by improving external conditions, is looking to policy-makers to allow them to manufacture to support economic recovery.

“The manufacturing sector has proven to be the catalyst for growth and main source of overall economic growth during this recovery period … We must allow higher export-related activities to facilitate our economic recovery,” FMM president Tan Sri Soh Thian Lai said in a statement dated June 24, asking that restrictions under the current Phase 1 of the Full MCO (FMCO) be relaxed, if not lifted, come June 28 because its members “need to survive”. Like members of the European Union chambers of commerce (EUROCHAM), Lai also red-flagged the need for Malaysian manufacturers to be allowed to continue being a key part of the global supply chain as economies and businesses slowly reopen as vaccinations pick up, or risk being replaced by others eyeing that space.

There is no doubt Malaysia needs to protect and deepen its connections to the global supply chain to ensure the longevity of this engine of growth for the economy — something that can be done with an effective testing and tracing strategy, on top of vaccination, to pave the way for safe reopening of the economy.

Not surprisingly, exports are a bright spot as evidenced in the World Bank’s 4.5% GDP forecast for 2021 (see table).

Even before the World Bank trimmed its GDP forecast from 6% to 4.5% on June 23, several economists had revised expectations for 2021 closer to 4%, following tougher movement restrictions imposed since June 1 under MCO 3.0, even though official forecasts still keep it at 6% to 7.5%, pending assessment of the impact of the latest measures. Growth at 4% levels, while comparable to longer-term averages for an upper-middle-income country such as Malaysia, really should be higher if more things are done right, owing to the low base last year.

Across the Causeway, the Monetary Authority of Singapore (MAS) said on June 14 that its latest poll of economists and forecasters found GDP expectations at 6.5% for 2021, up from 5.8% in the previous survey in March, before normalising to 4% in 2022. More than half of the city state’s population of 5.9 million have had at least their first dose of vaccine. Singapore aims to have two-thirds of its populace vaccinated by National Day on Aug 9.

As at June 24, over 4.92 million, or 15.1% of Malaysians, have had at least their first dose of vaccine, with 1.9 million, or 5.8% of the population, having received two doses — bringing total doses administered to 6.82 million. The government is confident of administering 11 million doses in July, 13 million does by end-August, and a further 8 million doses by end-September towards getting 60% of the population vaccinated by the end of September,  Khairy Jamaludin, Coordinating Minister for the Covid-19 National Immunisation Programme, said in a special address in conjunction with the release of the World Bank report on June 23. Malaysia, he says, needs to acquire the ability to produce test kits and successfully conduct research on vaccines as part of its strategy in the post-pandemic world..

To be sure, Malaysia is not the only country whose GDP forecast for 2021 had been revised lower because of the pandemic. If Malaysia only grows at 4.5% in 2021, however, the country’s growth would be below the 5.6% that the global economy is projected to grow this year — the strongest post-recession growth in 80 years, though some 1.9% below pre-pandemic projections. Recovery will be uneven across the globe.

There is hope, however, for the outlook to improve again. Brazil, which has close to a third of its population getting at least one dose of vaccine, for instance, is among the countries whose growth forecasts have been revised higher in the past year. The US, which has inoculated more than half its population, is projected to grow as much as 6.8% this year – up from expectations of only 4% a year ago, World Bank data show.  (See table on page 12).

If the number of cases can be brought down successfully by ongoing measures, including rapid vaccination, strict adherence to SOPs and the painful lockdowns, “Malaysia can look forward to strong economic recovery in the fourth quarter this year”, Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed said on June 23 when launching the World Bank’s Malaysia Economic Monitor, aptly titled “Weathering the Surge”.

In its 88-page report, the World Bank researchers said “ongoing domestic political uncertainty could continue to affect investment sentiment and hinder progress of the recovery”. “Speculation regarding a possible extension to the state of emergency [slated to last until August] and the future of the current governing coalition has contributed to uncertainty surrounding Malaysia’s political stability and the overall direction of its economic policies. The suspension of parliamentary sessions has led to delays in the tabling of the 12th Malaysia Plan, possibly affecting the process for Budget 2022,” the report read.

Their fear must not be allowed to come to pass if Malaysia hopes to move up the value chain and sustainably transition to that long-desired vision of becoming a high-income developed and inclusive nation.

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